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Policy rules and targets: framing the central banker's problem

  • Stephen G. Cecchetti

The author presents an analytical framework for the formulation of a central bank policy rule and examines some conceptual issues relating to the current debate over the effectiveness of such rules. In discussing the move by many central banks to adopt a price-level or inflation rate target--the basis for one type of rule--he suggests that central banks are implicitly changing the relative importance they attach to the goals of price and output stability. Using 1984-95 data, he shows that an effort to decrease inflation variability modestly could cause output to deviate significantly from its optimal path. The essay also addresses the influence of various types of uncertainty on policymaking, the possible justifications for interest rate smoothing, and the consequences of the fact that nominal interest rates cannot fall below zero.

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Article provided by Federal Reserve Bank of New York in its journal Economic Policy Review.

Volume (Year): (1998)
Issue (Month): Jun ()
Pages: 1-14

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Handle: RePEc:fip:fednep:y:1998:i:jun:p:1-14:n:v.4no.2
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  1. Bennett T. McCallum, 1997. "Issues in the Design of Monetary Policy Rules," NBER Working Papers 6016, National Bureau of Economic Research, Inc.
  2. Svensson, L-E-O, 1997. "Inflation Targeting : Some Extensions," Papers 625, Stockholm - International Economic Studies.
  3. Erica L. Groshen & Mark E. Schweitzer, 1997. "Identifying inflation's grease and sand effects in the labor market," Staff Reports 31, Federal Reserve Bank of New York.
  4. Cukierman, Alex & Kalaitzidakis, Pantelis & Summers, Lawrence H. & Webb, Steven B., 1993. "Central bank independence, growth, investment, and real rates," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 95-140, December.
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